The Buying Power Of Gold

Apr. 20, 2013 3:27 AM ETGLD, PHYS, IAU11 Comments
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Pacifica Partners

With a decade of surging gold prices behind us and a more recent period of weakness that has sent bullion back to mid-2011 levels, investors are left wondering what to do. This question actually consists of two real dilemmas. Firstly, for those owning copious amounts of bullion, gold stocks, or other precious metals - do I sell? For everyone else the question reduces down to, should I buy because gold is "cheap"?

Burdening the decision making of investors is the overabundance of polarized articles by "gold-bugs" and those less in favor of the yellow metal. Even billionaire investor Warren Buffett is frequently cited in the debate through his 1998 observations on gold in which he stated, "Gold gets dug out of the ground… we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."

It is true that gold is a relatively useless metal. It is not used widely in electronics unlike silver, it isn't widely used in the automotive industry unlike platinum, nor does it conduct electricity as well as copper, and we needn't even begin to make a comparison on the uses of gold versus steel. However, it is important to remember that gold has spanned thousands of years as a cornerstone of monetary systems. Ancient Egyptians used gold bars to standardize exchange of goods and gold even backed the US dollar until as recently as the 1970s.

It is because of this that gold investors should ultimately view gold as a currency similar to the Yen, Euro, or US Greenback. The value of gold comes from the fact that it is an element and can't be created thereby holding its value through scarcity and not through any industrial uses. This point

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